Insurance Commission not competent to regulate HMOs

The Insurance Commission (IC) may start handling the regulation of health maintenance organizations (HMO) before the year is over. President Aquino is close to signing the executive order transferring the regulatory control of HMOs from the Department of Health to the IC, according to Insurance Commissioner Emmanuel Dooc.

At present, the DOH supervises HMOs. It issues their clearance to operate as health service providers and sees to it that they provide healthcare services in accordance with the quality standards set by it. However, the DOH supervisory function does not extend to ensuring the financial viability of HMOs.

While HMOs assume the risk of incurring the medical expenses of their enrollees, like health insurance companies do for their plan holders, the two differ in functions. HMOs were originally conceived in the United States as organizations that would provide quality medical services at lower cost made possible by the strict management of the medical care given the enrollees. Health insurance companies merely compensate the plan holders for their medical expenses.

True to their name, the US HMOs focused on services geared toward health maintenance and preventive medicine and reducing unnecessary hospitalization and services. The strict control of the utilization of services such as specialist consultations, hospital admissions, and diagnostic/laboratory tests was a radical change from what American healthcare consumers were used to. Before the advent of HMOs in 1974, the rate of utilization of services was soaring uncontrollably due largely to the propensity of patients to avail themselves of healthcare services and partly to the financial incentives to the physicians and hospitals. After all, the insurance company paid for the services.

That strict control over the utilization of healthcare services was what made HMOs controversial in the beginning. But the US healthcare market had to choose between skyrocketing health insurance premiums and the considerably less expensive “managed care,” which HMOs and variations of the concept provided. Eventually, the American public accepted “managed care.”

However, doctor-owners of local HMOs have adamantly maintained that they are not in the insurance business but are providers of medical services and therefore should not be regulated by the IC. But by collecting in advance membership or enrollment fees in exchange for possible comprehensive medical care in the future, HMOs assume financial risks.

For that reason, an HMO should have a trained actuary—a business professional who uses mathematics, statistics and financial theory to analyze the financial consequences of risk—with extensive exposure to healthcare risks. The actuary should have pretty good estimates of how many members can be expected to enroll, how many of them would be hospitalized during the year, and how much their medical bills would run up to, to be able to set the right enrollment fees to cover the medical bills and overhead expenses. But local HMOs have not found it necessary to have a qualified healthcare actuary on board.

Many of the original members of the Association of HMOs of the Philippines (Ahmopi) no longer exist. A number of them were subsidiaries of big life insurance companies and were supposed to receive actuarial assistance from the parent companies. But there is a world of difference between mortality tables and predetermined benefits which life insurance company actuaries work with, and morbidity rates and variable medical expenses which health insurance actuaries use to calculate the premium.

At one time, the presidents of two large HMOs were professional actuaries, both graduates of the prestigious actuarial science program of the University of Michigan in Ann Arbor. One was the actuary of a life insurance company, parent company of the HMO, and the other a former consultant of the Social Security System. The same HMOs lost badly during the incumbency of those professional, highly-respected actuaries as neither of them had significant exposure to healthcare risks.

Now most of the members of Ahmopi are basically physicians group practices with no ties to insurance companies, and therefore without professional actuarial assistance. This is the reason Finance Secretary Cesar Purisima wants the HMOs to fall under the IC’s full supervision, to ensure that such healthcare providers are financially strong. The IC is supposed to be able to do this because of its actuarial competence.

The IC is required to always have one deputy commissioner who is a professional actuary. However, it does not have an actuary thoroughly knowledgeable of Philippine epidemiology—the incidence of the different diseases within a population—and the average cost of the treatment of each incident. It would be incapable to ensure the financial stability of HMOs.

The IC has even shown its lack of actuarial competence in life insurance, the business it has been regulating from its beginning in 1915. Its failure to prevent a life insurance company’s deficiency in its margin of solvency to amount to P2.1 billion is stark evidence of its lack of actuarial competence. The 80-year-old life insurance company has been in and out of a state of conservatorship since 2008. The HMO business, which evolved in the United States only in the 1970s, is much more complex than life insurance.

Without a government regulatory body competent to ensure the financial viability of HMOs, many HMOs may go the way of preneed companies, to the detriment of their enrollees.

Oscar P. Lagman Jr. used to head a major player in the health insurance/HMO industry and was director of the healthcare consulting practice of a large professional firm. He attended the executive program on managed care of the University of Missouri as a USAID grantee.